The Atlanta Lawyer April 2013 | Page 22

SECTION UPDATE Tax Law Section Update By Julian A. Fortuna The Saylor Law Firm LLP O n Tuesday, March 26, 2013, the Tax Law Section held a CLE Seminar on the American Tax Relief Act of 2012 (“ATRA”). The well-attended luncheon seminar sponsored by AB Bernstein Global Wealth Management featured a slide presentation entitled Paradigm Shift: The ATRA-Math accompanied by a lively commentary from Bernstein National Managing Director, Paul S. Lee. The focus of the presentation was the impact of ATRA on income, estate and gift tax planning for high net worth individuals and business owners. Paul began the seminar by reviewing pre-ATRA wealth tax planning which typically featured lifetime use of estate and gift tax exclusions and the avoidance of estate tax at every generation with less concern for a step-up in income tax basis at death because of the relatively low capital gain tax rates. In other words, income tax consequences were often viewed as secondary to estate, gift and generation skipping transfer taxes. Moreover, the state of the taxpayer’s residence usually did not significantly affect the overall plan. To set the stage for the “Paradigm Shift” Paul next touched on certain key tax provisions of ATRA including: ▪ Reunification of Gift, Estate and Generation-Skipping Transfer Taxes ▪ $5.25 million Applicable Exclusion Amount 2013 (indexed from 2011) ▪ Maximum Gift, Estate and Generation skipping transfer tax rate of 40% ▪ Portability of “Deceased Spousal Unused Exclusion Amount” ▪ Significant increases in income taxes on wealthy individuals, particularly on long-term capital gains and dividend income Paul then introduced the elements of what he called the “New Paradigm” for income, estate and gift tax planning for high net worth individuals: 22 THE ATLANTA LAWYER April 2013 [email protected] Estate Planning ▪ Multi-variable exercise depending upon age, asset level/ mix, income needs, etc. ▪Requires constant monitoring of the income and transfer tax consequences Applicable Exclusion Amount ▪ Use as little as possible during lifetime to preserve “stepup” in basis at death ▪ Rely on “zeroed-out” gifts to transfer wealth during lifetime Income Tax Considerations ▪ Can be more important than the transfer tax consequences ▪ Should be considered in tandem with potential transfer taxes Estate Tax Inclusion ▪ Can save more in income taxes depending upon asset mix in the estate ▪ Should be forced if the income tax savings are greater than the transfer tax cost State of Residence ▪ Will give rise to very different types of estate and income tax planning ▪ Factors favoring less estate tax planning: Community Property State, High State Income Tax, State Gift Tax (only CT), No State Estate or Inheritance Tax ▪ Factors favoring more estate tax planning: Separate Property State, Low or No State Income Tax, No State Gift Tax, High State Estate or Inheritance Tax To highlight the shift in importance from wealth transfer taxes to income taxes, Paul presented illustrations of the tax burdens on a hypothetical New York City (“NYC”) resident. Under prior law, that person was subject to a wealth transfer tax rate of 55%, an income tax rate of 28% on dividends and long-term capital gains, and an ordinary income tax The Official News Publication of the Atlanta Bar Association